TaxTMI 
TaxTMI 
2021 (7) TMI 87
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....engaged in the business of development, production and distribution of Elzimes and Bio-chemicals. 4. The first issue relates to disallowance of claim of expenditure incurred in respect of ESOP (Employees Stock Option Programme). The A.O. noticed that the assessee has claimed a sum of Rs. 1,25,49,035/- and Rs. 1,06,34,674/- under employees benefit expenses in assessment year 2012-13 and 2013-14 respectively. The assessee explained that the employees/directors of the assessee company are eligible to purchase shares of Novozymes A/S Denmark (holding company) as per terms and conditions specified in the stock option plan. The holding company shall issue shares at a price lower than the prevailing market price. As per the agreement, the holding company shall recover the loss arising to it on issue of shares (difference between average market price and issue price) to the employees of company from the assessee company. As per the ESOP scheme, the right to purchase shares of the holding company shall accrue to the employees proportionately over a period of 3 years. The assessee has entirely borne the loss arising on issue of shares to the ultimate holding company. The assessee company ....
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....to certain terms and conditions set out in the scheme. A copy of the ESOP is at page-28 to 31 of the Assessee's paper book. For the Assessment Year 2006-07, the assessee filed its return of income on November 29, 2006, reporting an income of Rs. 58,399,200. During the FY 2005-06, eligible employees of assessee (NNIPL) were given the option of purchasing shares of its parent company NNAS under the NNAS Global Share Programme, 2005 ("the Plan"). In this regard, 231 employees of the company had applied for purchase of 12,931 shares at the price of DKK 150 per share. Further, as per the Plan, the difference between the purchase price of the shares and the average market price of the shares during the purchase offer period (i.e., DKK 313.39) amounting to DKK 163.39 per share was recharged by NNAS to NNIPL. The Plan was conceptualised with a view to encouraging stock ownership among NNIPL's employees, to motivate and encourage employees to render services which would contribute to the continued growth and success of the company. Accordingly, since NNIPL has actually incurred the expenses during the subject financial year, the entire amount of ESOP recharge cost amounting to DKK....
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....y is concerned, the shares were in fact acquired by the assessee from the parent company and there was an actual outflow of cash from the assessee to the foreign parent company. The price at which shares were issued to the employees was paid by the employee to the Assessee who in turn paid it to the parent company. The difference between the fair market value of the shares of the price at which shares were issued to the employees was met by the Assessee. This factual position is not disputed at any stage by the revenue. In such circumstances, we do not see any basis on which it could be said that the expenditure in question was a capital expenditure of the foreign parent company. As far as the assessee is concerned, the difference between the fair market value of the shares of the parent company and the price at which those shares were issued to its employees in India was paid to the employee and was an employee cost which is a revenue expenditure incurred for the purpose of the business of the company and had to be allowed as deduction. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of t....
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....ny. The CIT(A) also found that though the shares of the parent company have been allotted, the same have been given to the employees of the Assessee at the behest of the Assessee. The CIT(A) thus held that it was an expense incurred by the assessee to retain, motive and award its employees for their hard work and is akin to the salary costs of the assessee. The same was therefore business expenditure and should be allowable in computing the taxable income of the assessee. The tribunal upheld the view of the CIT(A). It can be seen from the decision in the case of Accenture Services (P.) Ltd. (supra) that the shares of the foreign company were allotted and given to the employees of affiliate in India at the behest of the affiliate in India. The CIT(Appeals), however, presumed that the facts in the instant case of the assessee was that the shares were allotted to the employees of the affiliate in India at the behest of the foreign company. This is not the factual position in the assessee's case, as the assessee had on its own framed the NNIPL ESOP Scheme, 2005, to benefit its employees. NNAS may have a global policy of rewarding employees of affiliates with its shares being gi....
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....e Act, which reads as under: Section 37(1) says that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". 7. Thus, from perusal of section 37(1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of section 37(1) of the Act would be attracted. It is also pertinent to note that section 37 does not envisage incurrence of expenditure in cash. 8. Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined....
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....eduction under section 37(1) of the Act subject to fulfilment of the condition. 11. The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of Infosys Technologies Ltd.(supra) is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Years in question was 1997-98 to 1999-2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 1-4-2000. Therefore, it is evident t....
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....nces, since the facts are available already on record. The Ld. A.R. submitted that the claim of the assessee is supported by the decision rendered by Hon'ble Bombay High Court in the case of Sesagoa Ltd. Vs. ACIT (2020) 117 Taxmann.com 96 and also the decision rendered by the coordinate bench in the case of Wipro Ltd. Vs. ACIT (2020) 122 Taxmann.com 268. 13. We heard Ld. D.R. in this regard and perused the record. We notice that the claim of the assessee for deduction of payment of education Cess is held to be allowable by Hon'ble Bombay High Court in the case of Sesagoa Ltd. (supra). The said decision has been followed by the coordinate bench in the case of Wipro Ltd. (supra). For the sake of convenience, we extract below the decision rendered by Hon'ble Bombay High Court in the case of Sesagoa Ltd. (supra). "15. The substantial question of law No. (iii) in Tax Appeal No. 17 of 2013 and the only substantial question of law in Tax Appeal No. 18 of 2013 is one and the same namely, 'whether Education Cess and Higher and Secondary Education Cess, collectively referred to as "cess" is allowable as a deduction in the year of its payment ?'. 16. The aforesaid question arises....
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....rdly be said to arise : Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it. 19. Besides, when it comes to interpretation of the IT Act, it is well established that no tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden on him. The subject cannot be taxed unless he comes within the letter of the law and the argument that he falls within the spirit of the law cannot be availed of by the department. [See CIT v. Motors & General Stores [1967] 66 ITR 692 (SC)]. 20. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied, into the provisions which has not been provided by the legislature [See CIT v. Radhe Developers [2012] 17 taxmann.com 156/204 Taxman 543/341 ITR 403 (Guj.). One can only look fairly at the language used. No tax can be imposed by inference or analogy. It is also not permissible to construe a taxing statute by making assumptions and presumptions [See Goodyear v....
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....ly any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head "profits and gains of business or profession". Since the deletion of expression "cess" from the Incometax Bill, 1961, was deliberate, there is no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too, under the guise of interpretation of taxing statute. 26. In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F. No. 91/58/66-ITJ(19), dated 18th May, 1967 issued by the CBDT which reads as follows :- "Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 - Clarification regarding.- "Recently a case has come to the notice of the Board where the Income-tax Officer has disallowed the 'cess' paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act. 2. The view of the Income-tax Officer is not correct. Clause 40(a)(ii) of the Income-tax Bill, 1961 as introduced in the Parliament stood as under:- "(ii) any sum paid on account of any cess, rate ....
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.... the rate was fixed after consideration of the 'circumstances' of the assessee, including his business income. The Privy Council held that the rate was not 'assessed on the basis of profits' and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT 1971 [82 ITR 580] that the expression 'profits or gains of any business or profession' has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this subclause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to 'estimated income' or by a municipality with reference to 'gross income'. Besides, unlike Section 10(4) of the 1922 Act, this sub-clause does not refer to 'cess' and therefore, a 'cess' even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act. 30. The....
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....Ms. Linhares, has relied upon Unicorn Industries v. Union of India [2019] 112 taxmann.com 127 (SC) in support of her contention that "cess" is nothing but "tax" and therefore, there is no question of deduction of amounts paid towards "cess" when it comes to computation of income chargeable under the head profits or gains of any business or profession. 35. The issue involved in Unicorn Industries (supra) was not in the context of provisions in Section 40(a)(ii) of the IT Act. Rather, the issue involved was whether the 'education cess, higher education cess and National Calamity Contingent Duty (NCCD)' on it could be construed as "duty of excise" which was exempted in terms of Notification dated 9th September, 2003 in respect of goods specified in the Notification and cleared from a unit located in the Industrial Growth Centre or other specified areas with the State of Sikkim. The High Court had held that the levy of education cess, higher education cess and NCCD could not be included in the expression "duty of excise" and consequently, the amounts paid towards such cess or NCCD did not qualify for exemption under the exemption Notification. This view of the High Court was ....
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....t the claim of deduction not made in the original returns and not supported by revised return, was admissible. The Revenue had relied upon Goetze (supra) and urged that the ITAT had no power to allow the claim for deduction. However, the Division Bench, whilst proceeding on the assumption that the Assessing Officer in terms of law laid down in Goetze (supra) had no power, proceeded to hold that the Appellate Authority under the IT Act had sufficient powers to permit such a deduction. In taking this view, the Division Bench relied upon the Full Bench decision of this Court in Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351/66 Taxman 27 (Bom.) to hold that the Appellate Authorities under the IT Act have very wide powers while considering an appeal which may be filed by the Assessee. The Appellate Authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the Assessee in accordance with law. 40. The decision in Goetze (supra) upon which reliance is placed by the ITAT also makes it clear that the issue i....